Profit? That's for other products. Amazon gets more important benefits from selling books.

Despite its dominance of the book business, Amazon probably derives little, if any, direct profit from selling books. But, as demonstrated by its new brick-and-mortar stores, Amazon derives plenty of value from books.

You can’t understand Amazon the book seller – and how to work with or compete against it – by thinking only about books.

For Amazon, books have always been a springboard to bigger and better things. The company was at best a breakeven venture in its early years as a books-only and then books-mostly retailer, and today it still doesn’t have to earn a cent of profit from books to be a successful bookseller.

Even when Amazon.com started up 22 years ago as an online bookstore, Jeff Bezos’ vision went far beyond books. Or profits: He reportedly didn’t plan to earn a profit for at least four years.

The focus was on growth – acquiring new customers, retaining them with an unmatched shopping experience, and then leveraging that customer base to expand into new types of products.

Books were the perfect way for Amazon to cuts its teeth as an online store. Perhaps no other consumer product offers more SKUs per dollar of sales. Even the largest physical bookstore in the world couldn’t possibly stock anywhere close to all of the books in print.

That left an opening for Amazon that the fledgling company could exploit only by mastering the art and science of marketing, selling, storing, and shipping hundreds of thousands of titles. The resulting lessons it learned and innovations it developed became the foundation for its rapid expansion into other types of merchandise.

Selling books shaped Amazon as much as Amazon reshaped how books are sold.

A gift from book publishers

Amazon recognized early on that each unique snowflake of a book came with a gift from its publisher: book metadata. That’s the information about each title (such as genre, author, description, unique ID number, and reviews) that traditionally enabled bookstores and libraries to decide what to buy and where to shelve it.

A 2006 Amazon promotion

Amazon took the radical (in the mid-1990s) step of putting all that metadata online, enabling it to dominate book-related searches.

Without Amazon having to spend a cent on marketing, consumers soon learned via the likes of Yahoo! and later Google where to find a title not stocked by their local bookstore. And they learned Amazon would show them similar books, using a recommendation engine fueled by book metadata and other customers' purchase history.

I’m told it took well over a decade for the traditional book-publishing industry to grasp that book metadata should be written for algorithms and consumers, not just for professional book buyers. By then, Amazon had long since leveraged what it learned about the data-based selling of printed books to dominate the e-book business – and to power its moves into selling everything from toasters to groceries.

A gateway drug

To make books a true gateway drug to the Amazon experience, it wasn’t enough just to stock every book publishers had to offer. Too much of the demand was for books that were no longer in print.

From Amazon's Japanese-language site

Amazon had to lure those used books out of myriad basements and offline stores by creating a marketplace that even non-techies could use to sell their wares. That was the beginning of what became a major competitive advantage for Amazon – its third-party sellers, which generate nearly half of the site’s sales.

Books were also the launching pad for Amazon’s entry into the gadget business nearly 10 years ago with the release of its first Kindle. That venture has traveled light-years from those humble, monochromatic beginnings to a new Alexa-enabled world filled with Fires and Echoes.

Revolution, then civil war

“Kindle” itself morphed from a device to an entire ebook-publishing ecosystem that brought both revolution and civil war to the book industry. The Kindle Revolution popularized the struggling ebook category and democratized publishing by enabling authors to bypass the traditional world of publishers and middlemen.

To those in the traditional book-publishing business, Amazon is the Evil Empire, hell-bent on destroying both book publishing companies and competing book sellers. On the other side of the civil war are myriad author-entrepreneurs hailing Amazon as the white knight who valiantly liberated publishing from snobby, self-appointed gatekeepers so that anyone can publish a book.

Neither side seems to understand Amazon, because they envision Amazon as being fundamentally a seller of books. It’s not. A 2014 New Yorker article indicated that Amazon gets at most 7% of its annual revenue from books.

Where’s Chapter 11?

Journalists and book publishers have been assuming for years that Amazon wanted to drive Barnes and Noble out of business. I don’t buy it. Why create a firestorm of legal entanglements and public-relations backlash for the entire company just to boost profits in a relatively slow-growth 7% of your business?

If Amazon really wanted to drive large bookstores out of business, don’t you think B&N would be in bankruptcy reorganization by now? And wouldn’t Amazon’s new brick-and-mortar stores at least match the 20,000-title selection of a small B&N instead of offering only 5,000 titles?

Besides, I don’t think book selling for Amazon is about profits. It’s about data and branding.
As I wrote in Magazines in the Amazon, a recent Publishing Executive article, Amazon is “a master at using customers’ purchase and search data to determine what other products to pitch to them – and, increasingly, to sell ads to third parties.”

Fifty Shades of Data

More than almost any other purchases, the books someone buys and browses, whether print or ebook, provide Amazon valuable insights into what other products she might buy and which ads she might click. (Magazine purchases can be even more revealing, which I think is why Amazon is selling single-copy magazines in its new brick-and-mortar stores even though it doesn’t market them on its web site.)

In the ecommerce and programmatic advertising worlds, such information about people’s interests and purchase intent is gold.

Some book purchases are more revealing than others. I assume that people interested in travel guides are relatively likely to click on luggage ads, that buyers of how-to guides often need tools or other equipment as well, and that Fifty Shades of Grey readers have a fondness for certain adult toys.

And I’m sure that Amazon’s algorithms have found many other valuable correlations -- correlations that would never occur to the human brain -- between what people read and what else they’ll click or buy.

In other words, for Amazon, some books are more valuable than others. That may explain why Amazon seems to discount select books to seemingly unprofitable levels, allows third-party sellers to charge as little as 1 cent for used books, and encourages self-publishers to offer 99-cent and even free ebook editions.

When there are such strong incentives to know what books people are searching for and especially what they’re buying, profit on book sales naturally takes a back seat.

Big McAmazon

Obvious question: If Amazon makes little or no profit from selling books, why is it opening a chain of brick-and-mortar bookstores?

Answer: It’s not. Amazon Books is probably a bookstore in the same sense that McDonald’s is a hamburger restaurant. Burgers are of course the featured attraction at Mickey D’s, yet almost all the profits come from side items. But who’s going to eat at a fries-and-soft-drinks joint?

Early reports indicate that about half of the new Amazon Books stores are actually devoted to books. The rest of the space offers appliances, Amazon-branded gadgets, magazines, and other non-book merchandise and displays.

Amazon wants you to think of these places as bookstores – as places where interesting, curious people go to browse. The real money may be in getting those browsers to check out the Fires, Echoes, and Cuisinarts. But if people wanted to hang out at appliance stores the way they do at bookstores, Best Buy would be a major tourist attraction.

The hipsters' Walmart

In many ways, Amazon is the Sam Walton model translated to the digital age – massive selection, with low prices made possible by both scale and an incessant drive for efficiency. There’s significant overlap in the products offered by Amazon and Walmart. Yet why has Amazon escaped the downscale, hope-my-friends-don’t-find-out-I-shop-there image that plagues Walmart?

Books. Plenty of people buy from both Amazon and Walmart, but the public’s perception of the two brands are vastly different. Amazon’s beginnings as an online bookseller meant its clientele was – and still is -- assumed to be hip and educated. Because of Walmart’s start in small-town USA, it’s still the butt of many a comedian’s quip about the denizens of double-wides.

In marketing, perception is reality. That’s why Amazon still wants people to think of it as a bookseller and to ignore that 7% statistic.

If Amazon’s vision to be The Everything Store continues to mean a 20+% annual growth rate, books will constitute an ever-shrinking proportion of its sales. Nevertheless, books are likely to remain Amazon’s Big Mac – not very profitable but still central to its brand identity and its strategy.

3 comments:

When buying on-line from Amazon, you obviously have to identify yourself, thus building their algorithm and sales data. But do you have to identify yourself at the brick-and-mortar store? Do they take cash?

Let us not forget that Mr. Bezos purchased the Washington Post in 2013. Indeed, is it all part of a strategy for maintaining appeal to the high brow and educated (though at the end of the day they are purchasing Cuisinarts)? If so, brilliantly executed...

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